I have a question in relation to CPIF type contracts. Have you any knowledge of Level of Effort (term) type acquisition being award under CPIF type contract. If so how are costs incentivized under this type contract?
Definitions: a level of effort contract “is a type of contract stating the work in terms of an amount of effort (usually labor-hours or labor-years) to be performed by specified classes of employees over a given period of time. There are four types of level-of-effort contracts: Fixed-Price Level of Effort, Time and Materials Contract, Labor-Hours Contract and Term Contract.” 1
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In this type of contract the contractor is receiving compensation not based on product delivered or services completed but on the labor hours expended, regardless of whether or not the work is completed. The Government is buying labor hours. “There are two techniques used to contract for a level of effort. First, the parties can agree to fixed hourly rates for specified classes of labor with payment based on the number of actual hours incurred.”2 This would be accomplished through a labor-hour contract or time-and-material contract if material costs need to be included, see FAR 16.6. “The second technique provides a stated amount of compensation for the incurrence of a specified number of labor-hours over a fixed period of time. This type of contract is generally called a “term” type contract and can be written as a ‘firm-fixed-price, level-of –effort, FAR 16.207, or a Cost Plus Fixed Fee (CPFF) term contract, FAR 16.306 (d).2 The contractor’s profit is built into the labor rate charged, this is known as a loaded or burdened labor rate. Contractor’s profit is tied to the number of labor hours they charge to the contract.
FAR 16.401 “(a) Incentive contracts as described in this subpart are appropriate when a firm-fixed-price contract is not appropriate and the required supplies or services can be acquired at a lower costs and, in certain instances, with improved delivery or technical performance, by relating the amount of profit or fee payable under the contract to the contractor’s performance. “
There are two basic types of incentive contracts fixed price and cost-reimbursement (see FAR 16.4). Incentive contracts must include addition profit incentives based upon cost savings or cost controls, these contract types may also include additional profit based upon accelerated delivery and/or increase performance. The contractor receives an additional percentage of profit based on the amount of cost savings between the target cost and the actual cost (actual cost is less than the target cost). The contractor can also have their profit reduced if actual costs are greater than the target cost.
In a level-of-effort contract the Government is paying for all the labor-hours the contractor incurs which includes profit, it is not clear how one could design a cost incentive under a level-of-effort contracting arrangement and no examples are shown for using level-of-effort and incentives together. They might be used in a hybrid type contract, applying level-of-effort and CPIF to different Contract Line Items (CLINS) but not together.
Hopefully this information will give you a good start to conduct further research and analysis.
1. The Government Contract Reference Book, Third Edition, 2007.
2. Formation of Government Contracts, Third Edition, 1998, Cibinic and Nash